The Experts

At the whim of that man

Try as we might, we just can’t seem to get away from thinking and worrying about Donald Trump. In all my years analysing global markets, never have I had to worry so much about the erratic actions of the most important person in the world, the President of the United States of America.

Today we all do.

The shame is that global economic indicators are otherwise doing fairly well. Indeed, the best global macro news in recent months is the fact that US wage and price inflation has remained fairly contained, such that it still seems likely the US Federal Reserve will not need to ratchet up interest rates too far, nor too fast, anytime soon.

Meanwhile, thanks in part to Trump’s tax cuts late last year, the US earnings outlook remains robust. Strong earnings and the pull back in share prices since January have left equity valuations at more comfortable levels. To my mind, stocks would be poised to shake off their recent correction and re-test old highs were it not for the lingering risks surrounding that man.

As I stated a few months ago, my base case has been that Trump would not be boneheaded enough to persist with his trade crusade were it to start to seriously risk the US economy and/or the share market. But that view is beginning to be seriously tested, because China and Europe have promptly retaliated, and Trump has upped the ante by threatening even more tariffs.

As Trump may be now discovering, unlike in the sphere of business where companies will suck it up if their opponent presses an advantage and it makes financial sense to do so, countries are ruled by politicians where national pride usually take precedence - even at the risk of short-term economic costs.

As a result, China and Europe are not buckling and seem prepared to see if Trump is bluffing. Although China exports more to America than it imports (so can’t levy as many tariffs) it can still frustrate US trade in far more effective and insidious ways through investment restrictions or more onerous red tape on US companies operating within its borders.

As for Europe, all it needs to do is surgically impose tariffs on goods from politically sensitive US regions, like Harleys and Whisky. Already, Trump has started picking a fight with Harley Davidson, who says it may shift some production to Europe to avoid new European tariffs.

This trade war is not so easy to win after all.

As I’ve long maintained, America has legitimate trade and national security concerns (as do we) that do require careful review of investment policies and vigorous pursuit of restrictive practises in negotiated trade deals. But while seemingly popular with his political base, blanket tariffs are the wrong way to go and hurt America has much as their trade allies. Indeed, despite what Trump says, it’s not foreign countries that pay US tariffs – it’s US consumers and business.

At this stage, it’s not the tariffs per se that pose risks to the global economy – given they still cover only a relatively small portion of total trade flows between these major economies. But it’s the persistent negative headlines and ongoing uncertainty over just how and when the tit-for-tat dispute will end, that is causing the greatest risk to both business and investor sentiment.

What’s especially frustrating for markets is that Trump has just unilaterally imposed tariffs, while issuing vague complaints about restrictive trade practises in China and Europe. It would help if he listed specific grievances that could at least be the focus of negotiations at agreed meetings on specific dates. But markets as yet have no specific meetings or dates to focus on.

Trump can change, and often on a dime. After copping some political heat, he promptly abandoned his policy of forced separation of children from their asylum-seeking parents at the Mexican border. And he’s now great friends with the leader of North Korea. I still hold out hope that sanity will eventually prevail on trade as well.

But until such time as there is greater clarity over a possible negotiated settlement it will be hard for markets to make any gains, and the risk of a steeper drop intensifies.

Sometimes, unfortunately, markets conditions need to get worse – so as to goad politicians into corrective action – before they have a chance of getting much better.